Striking a blow against fascism with commentary on current events, finance, economics, politics, music, art, culture and how to deal with our economic lives being bartered away by the elites who have our financial future all figured out: We'll be paying off their debts forever.

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"We Americans are the ultimate innocents. We are forever desperate to believe that this time the government is telling us the truth." - Sydney Schanberg

"The red-breast whistles from a garden-croft, / And gathering swallows twitter in the skies." - John Keats

"It is not necessary that you leave the house. Remain at your table and listen ... The world will present itself to you for its unmasking." - Franz Kafka

"“We of the craft are all crazy,” wrote Lord Byron about himself and his fellow poets. “Some are affected by gaiety, others by melancholy, but all are more or less touched.”"

"The world is a dangerous place to live; not because of the people who are evil, but because of the people who don't do anything about it." - Albert Einstein

"In my lifetime we've gone from Eisenhower to George W. Bush. If this is evolution, I believe within twelve years we'll be voting for plants." - Lewis Black

"In a time of universal deceit, telling the truth becomes a revolutionary act." – George Orwell

Senator Frank Church in 1975 chaired the Senate Hearings on the FBI’s Cointelpro operation, which spied upon and attempted to infiltrate, disrupt and discredit the peace movement. . . "if a dictator ever took over, (the NSA) could enable to impose total tyranny, and there would be no way to fight back. . . . That capability at any time could be turned around on the American people, and no American would have any privacy left, such is the capability to monitor everything: telephone conversations, telegrams, it doesn’t matter. There would be no place to hide. . . . I don’t want to see this country ever go across the bridge. I know the capacity that is there to make tyranny total in America, and we must see to it that this agency and all agencies that possess this technology operate within the law and under proper supervision, so that we never cross over that abyss. That is the abyss from which there is no return."

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Conservative Animus

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Conservatism is the theoretical voice of this animus against the agency of the subordinate classes. It provides the most consistent and profound argument as to why the lower orders should not be allowed to exercise their independent will, why they should not be allowed to govern themselves or the polity. Submission is their first duty, agency, the prerogative of the elite.

Current Readers

Politicus USA on GOP Fascism

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The entire GOP apparatus is slipping toward fascism and millions of Americans have been indoctrinated to believe that the Bible none of them have read takes precedence over the Constitution none of them have read.

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Waiting for Grand Dad

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Eco Farm Shitakes, Squash, Kale - Cindi, Nicole & Eddie

Ukraine Disinformation Battle: Little Green Men, Hamsters and the Fog of War

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There has always been a gap in how media on both sides of the former Iron Curtain have reported world events, and it’s growing as the crisis in Ukraine escalates. It has become increasingly difficult to obtain reliable information from any side — west, east, or further east — about what is going on in Eastern Ukraine.
While powerful propaganda machines fill the public space with smoke and mirrors, one of the few facts that can be positively established in Eastern Ukraine is that the body count is steadily growing: a testament of just how easy it is for self-interested foreign powers to start, either intentionally or recklessly, a civil war in the heart of Europe. Continuing coverage is available at this link and this link.

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Red Roots Farm - Kristen & Jason - No Sprays/Delicious Veggies!

Fukushima, Japan Disaster Worsens and Spreads

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While the American reactor industry continues to suck billions of dollars from the public treasury, its allies in the corporate media seem increasingly hesitant to cover the news of post-Fukushima Japan. Continuing coverage is available at this link, this link, and this link.

My Blog Fights Climate Change

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Paul Krugman:

I don’t think many people grasp just how raw, how explicit, the corruption of our institutions has become.

Yesterday I had a conversation with someone who, like me, spent most of the Bush years as a voice in the wilderness. And he pointed out something remarkable: although those of us who said the obvious — that the Bush administration was fundamentally monstrous — were ridiculed by all the respectable people at the time, at this point our narrative has become everyone’s narrative.

Cirze's World

Paul Craig Roberts:

_________________ US Media
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"Anyone who depends on print, TV, or right-wing talk radio media is totally misinformed. The Bush administration has achieved a de facto Ministry of Propaganda."

"The uniformity of the US media has become much more complete since the days of the cold war. During the 1990s, the US government permitted an unconscionable concentration of print and broadcast media that terminated the independence of the media.

Today the US media is owned by 5 giant companies in which pro-Zionist Jews have disproportionate influence. More importantly, the values of the conglomerates reside in the broadcast licenses, which are granted by the government, and the corporations are run by corporate executives — not by journalists — whose eyes are on advertising revenues and the avoidance of controversy that might produce boycotts or upset advertisers and subscribers.

Americans who rely on the totally corrupt corporate media have no idea what is happening anywhere on earth, much less at home."

_________________ War On Terror
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Roberts asked "Is the War on Terror a Hoax", and claims it has "killed, maimed, dislocated, and made widows and orphans of millions of Muslims in six countries". Roberts called the attacks "naked aggression" on civilian populations and infrastructure which constitute war crimes.

_________________ Republican Party
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Roberts is seriously dismayed by what he considers the Republican Party's disregard for the U.S. Constitution. He has even voiced his regret that he ever worked for it, avowing that, had he known what it would become, he would never have contributed to the Reagan Revolution.

_________________ American Democracy and Oligarchy
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Roberts has been increasingly critical of what he deems as the lessening of democracy in the U.S.; instead accusing it of being run by oligarchs by stating:

"The west prides itself that it is the standard for the world, that it is a democracy. But nowhere do you see democratic outcomes: not in Greece, not in Ireland, not in the UK, not here, the outcomes are always to punish the innocent and reward the guilty.

And that's what the Greeks are in the streets protesting. We see this all over the west. There is no democracy, there are oligarchies, some of these smaller European countries are not even run by their own governments, they are run by Wall Street... There is probably more democracy in China than there is in the west.

Revolution is the only answer... We are confronted with a curious situation. Throughout the west we think we have democracy, we hold ourselves up high, we demonize China, we talk about the mafia state of Russia, we talk about the Arabs and so on, but where is the democracy here?"

_________________ Farewell Speech
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"Truth Has Fallen and Taken Liberty With It,"

Roberts effectively announced his journalistic retirement. The article, published at Counterpunch.org, begins:

"There was a time when the pen was mightier than the sword. That was a time when people believed in truth and regarded truth as an independent power and not as an auxiliary for government, class, race, ideological, personal, or financial interest."

It proceeds to a bitter chronicle of the demise of American intellectual integrity, particularly that of financial journalists and economists. These have been thoroughly corrupted by monetary inducements to misrepresent and ignore what has been, in effect, the systematic dismantling of the nation's productive life, in the name of globalization.

He holds the members of his own journalistic profession largely responsible for abetting relentless outsourcing of American industry, thereby gutting the American middle class and effectively dooming the nation's future.

He describes his own ostracism from mainstream media access, the consequence of his relentless and unflinching criticism of the demolition process over the past decade. His column ends, "The militarism of the U.S. and Israeli states, and Wall Street and corporate greed, will now run their course. As the pen is censored and its might extinguished, I am signing off."

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Cirze's World

Liberal?

"If by a 'Liberal' they mean someone who looks ahead and not behind, someone who welcomes new ideas without rigid reactions, someone who cares about the welfare of the people — their health, their housing, their schools, their jobs, their civil rights, and their civil liberties — someone who believes we can break through the stalemate and suspicions that grip us in our policies abroad, if that is what they mean by a “Liberal,” then I’m proud to say I’m a “Liberal."

John F. Kennedy, 1960

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Citizen's United

"[T]his Court now concludes that independent expenditures, including those made by corporations, do not give rise to corruption or the appearance of corruption. That speakers may have influence over or access to elected officials does not mean that those officials are corrupt. And the appearance of influence or access will not cause the electorate to lose faith in this democracy."

Thursday, October 31, 2013

(Please consider making even a small contribution to the Welcome to Pottersville2 Quarterly Fundraiser happening now ($5.00 is suggested for those on a tight budget) or sending a link to your friends if you think the subjects discussed here are worth publicizing. Thank you for your support. We really appreciate it. Anything you can do will make a huge difference in this blog's ability to survive in these difficult economic times.)

Just a reminder: this is the true nature of the bipartisan, militarized "security state" now headed by the progressive Nobel Peace Prize Laureate. When you support the Laureate -- however "savvily" and "critically" -- when you support the system -- hoping to "reform" it from within -- this is what you are supporting. From the Guardian . . . .

Running at over 1200 words, the article describes the exhumation of the remains of the likes of leftist Chilean poet and Nobel Laureate Pablo Neruda, deposed leftist Brazilian Presidents Joao Goulart and Juscelino Kubitschek, ousted Chilean President Salvador Allende Gossens and his predecessor Eduardo Frei Montalva—all of whose deaths are viewed with suspicion by Latin Americans. Yet Romero manages to mention a possible US role only once, and then only indirectly and with reference to a half-century old case —when he notes that Brazil’s elected President Goulart had been ousted from office in a 1964 military coup “supported by the United States.”

Condor was a vast conspiracy that involved the cooperative efforts of the intelligence agencies of all the military dictatorships in the region which, during the 1970s and 1980s, killed as many as 35,000-50,000 people, mostly leftist leaders, labor activists, and opponents of those dictatorships.

This lapse is particularly outrageous given that in years past, even the New York Times itself reported on the intimate role of the US in the creation and operation of Operation Condor.

For example, in a March 6, 2001 article, the NY Times reported on a “recently declassified” US State Department document. It revealed that the US had facilitated communications among South American intelligence agency heads who were busy trying to eliminate left-wing opposition groups in their respective countries. Part of the program involved going after opposition leaders who had fled coups and were living in neighboring South American countries.

The document in question, a 1978 cable to then US Secretary of State Cyrus Vance from the US ambassador to Paraguay, Robert E. White, was unearthed by Professor J. Patrice McSherry of Long Island University, who called it “another piece of increasingly weighty evidence suggesting that U.S. military and intelligence officials supported and collaborated with Condor as a secret partner or sponsor.”

In this cable, Ambassador White reports on a conversation he had with the chief of staff of Paraguay’s military, General Alejandro Fretes Davalos, who he says informed him that the South American intelligence agencies involved in Operation Condor “keep in touch with one another through a U.S. communications installation in the Panama Canal Zone which covers all of Latin America.” That communications station, he wrote, was “employed to coordinate intelligence information among the southern cone countries.”

White, in this memo to Vance, expresses a fear that the U.S. role in Operation Condor might be revealed during a then active criminal investigation into the assassination of former Chilean foreign minister Orlando Letelier and an American colleague, Ronni Moffitt—both of whom were killed by an explosive device placed in their vehicle in Washington, D.C. “It would seem advisable,” writes White, “to review this arrangement to insure that its continuation is in U.S. interest.”

Another document discovered at the same time, this one a CIA cable concerning the Brazilian junta’s role in Operation Condor, refers to “Condor-Tel,” described as the “communications network established by the Condor countries.” It also refers to “European operations” of the Condor countries, which likely involved assassination plots against ousted leaders and activists currently living in asylum there after fleeing their martial-law homelands in Latin America.

The Times Tango

The whole approach taken by Times journalist Romero, with the apparent cooperation or perhaps encouragement of the paper’s foreign editors, was to present the current exhumations of important leftist corpses (the ones he cites actually date from between 2004 and 2013) like Neruda’s, Goulart’s, Kubitschek’s and Frei’s—as part of some kind of delightful if arcane Latin American cultural tradition. It was an “exhumation fever,” as he puts it, even going so far as to write, “Scholars say the practice may be the secularized continuation of customs from the time of early Christianity, when a vibrant trade involved the body parts of saints.”

None of these exhumations, however, involve the selling of body parts. They are about looking for evidence that important leftist leaders and political figures, said to have died natural deaths, may have in fact been assassinated in conspiracies that, for the most part, could likely be traced back to the US and the Central Intelligence Agency. Romero mentions none of this.

Salvador Allende Gossens

In the case of Chile’s President Frei, for example, who was president of Chile until the election of Marxist Socialist Allende, his death in 1982 had long been officially attributed to complications following an operation for a stomach ailment. But because by that time the retired Christian Democrat had become a sharp critic of martial law under Chilean dictator Augusto Pinochet, the general who had led the coup against Allende, there were always suspicions he had been murdered. In fact, as Romero reports, after his body was exhumed, forensics experts concluded that Frei had been poisoned by small doses of mustard gas and the highly toxic heavy metal element thallium.

Augusto Pinochet

What Romero doesn’t report is that back in 1982, under President Ronald Reagan and CIA Director William Casey, Operation Condor was in full swing. It is unlikely that Pinochet—largely a US creation and puppet, whose coup in 1973 overthrowing Allende was the handiwork of President Nixon’s National Security Advisor Henry Kissinger—would have had Frei killed on his own, without US permission. (Even when he mentions the 1973 coup in Chile, Romero fails to say a word about the central US role in fomenting it.)

Goulart too, was said to have died of a heart attack back in 1976, when he was living in exile in Argentina. The exhumation of his body is being undertaken to see if he was actually poisoned. While Romero mentions that concern, he fails to mention who the prime suspects would be behind such a murder:

Condor and, by extension, the CIA.

Escalating the Disinformation

The New York Times has long censored its coverage of Latin America, particularly when it comes to the covert actions of the US government to undermine popular democracy in what Washington considers to be its “backyard.” But this particular piece by Romero takes that censorship to the level of the absurd.

He even fails to note, in an aside mentioning the recent exhumation of the body of the late Palestine Authority leader Yasser Arafat, who died mysteriously of unknown causes in 2004, that Swiss medical experts had found traces of the rare and highly toxic element Polonium on his clothing. Such a finding, which was published in the respected British medical journal, The Lancet, makes it probable that Arafat was poisoned. Only a limited number of intelligence agencies have ready access to Polonium, among them agencies in the US, USSR and Israel, the latter of which had long made its dislike of Arafat clear, at one point in 2002 threatening to bomb him as he holed up in the badly damaged Palestinian Authority headquarters.

Joao Goulart

It should come as no surprise that Romero, a long-time South American correspondent for the Times who is currently posted to Brazil, would write such an article so blatantly censoring out the history of US covert action in Latin America. Romero also notoriously wrote an absurd scare story, based solely upon Defense Intelligence Agency data, purporting to show that Venezuela was becoming a regional military threat, though as Fairness and Accuracy in Reporting noted, Venezuela’s military at the time was dwarfed by both Colombia’s and Brazil’s and was 1/500th the size of the US military.

To give Romero his due, though, the problem is larger than one reporter. Indeed, transforming the horrific doings of this country into “honey isn’t that fascinating” folkloric excursions is nothing new—and not limited to any one Timesman or woman. Indeed, using “cultural tradition” to explain why anyone would want to exhume popular figures who died under suspicious circumstances is reminiscent of a previous New York Times article in which the author used pseudopsychology, and even neurology, to explain why some people believe in conspiracy. Another example would be the hiring of the popular filmmaker Errol Morris to make the assassination of John F. Kennedy a “delightful” example of coincidence in action via the strange case of the “Umbrella Man” on the Grassy Knoll (see this and this.)

***
When it comes to the political murders that underlie most of the current exhumations in Latin America, we have no way around what looks like the Times’ deliberate failure to mention the potentially explosive issue of US sponsorship. That this astonishing oversight comes at a time of rising anti-American sentiment in many of the same Latin American countries seeking closure and justice cannot go unmentioned. And as we mourn these tragic deaths, we might add one more, right here in the United States: the slow death of honest journalism. It’s time to exhume the truth—everywhere.

Would you be shocked to learn that the FBI apparently knew that some organization, perhaps even a law enforcement agency or private security outfit, had contingency plans to assassinate peaceful protestors in a major American city — and did nothing to intervene?

Would you be surprised to learn that this intelligence comes not from a shadowy whistle-blower but from the FBI itself – specifically, from a document obtained from Houston FBI office last December, as part of a Freedom of Information Act (FOIA) request filed by the Washington, DC-based Partnership for Civil Justice Fund?

To repeat: this comes from the FBI itself. The question, then, is: What did the FBI do about it?

The Plot

Remember the Occupy Movement? The peaceful crowds that camped out in the center of a number of cities in the fall of 2011, calling for some recognition by local, state and federal authorities that our democratic system was out of whack, controlled by corporate interests, and in need of immediate repair?

That movement swept the US beginning in mid-September 2011. When, in early October, the movement came to Houston, Texas, law enforcement officials and the city’s banking and oil industry executives freaked out perhaps even more so than they did in some other cities. The push-back took the form of violent assaults by police on Occupy activists, federal and local surveillance of people seen as organizers, infiltration by police provocateurs—and, as crazy as it sounds, some kind of plot to assassinate the “leaders” of this non-violent and leaderless movement.

But don’t take our word for it. Here’s what the document obtained from the Houston FBI, said:

An identified [DELETED] as of October planned to engage in sniper attacks against protestors (sic) in Houston, Texas if deemed necessary. An identified [DELETED] had received intelligence that indicated the protesters in New York and Seattle planned similar protests in Houston, Dallas, San Antonio and Austin, Texas. [DELETED] planned to gather intelligence against the leaders of the protest groups and obtain photographs, then formulate a plan to kill the leadership via suppressed sniper rifles. (Note: protests continued throughout the weekend with approximately 6000 persons in NYC. ‘Occupy Wall Street’ protests have spread to about half of all states in the US, over a dozen European and Asian cities, including protests in Cleveland (10/6-8/11) at Willard Park which was initially attended by hundreds of protesters.)

Occupiers Astounded — But Not Entirely

Paul Kennedy, the National Lawyers Guild attorney in Houston who represented a number of Occupy Houston activists arrested during the protests, had not heard of the sniper plot, but said, “I find it hard to believe that such information would have been known to the FBI and that we would not have been told about it.” He then added darkly, “If it had been some right-wing group plotting such an action, something would have been done. But if it is something law enforcement was planning, then nothing would have been done. It might seem hard to believe that a law enforcement agency would do such a thing, but I wouldn’t put it past them.”

He adds, “The use of the phrase ‘if deemed necessary,’ sounds like it was some kind of official organization that was doing the planning.” In other words, the “identified [DELETED” mentioned in the Houston FBI document may have been some other agency with jurisdiction in the area, which was calculatedly making plans to kill Occupy activists.

Kennedy knows first-hand the extent to which combined federal-state-local law enforcement forces in Houston were focused on disrupting and breaking up the Occupy action in that city. He represented seven people who were charged with felonies for a protest that attempted to block the operation of Houston’s port facility.

That case fell apart when in the course of discovery, the prosecution disclosed that the Occupiers had been infiltrated by three undercover officers from the Austin Police department, who came up with the idea of using a device called a “sleeping dragon” -- actually chains inside of PVC pipe -- which are devilishly hard to cut through, for chaining protesters together blocking port access. The police provocateurs, Kennedy says, actually purchased the materials and constructed the “criminal instruments” themselves, supplying them to the protesters. As a result of this discovery, the judge tossed out the felony charges.

FBI Response

WhoWhatWhy contacted FBI headquarters in Washington, and asked about this document—which, despite its stunning revelation and despite PCFJ press releases, was (notwithstanding a few online mentions) generally ignored by mainstream and “alternative” press alike.

The agency confirmed that it is genuine and that it originated in the Houston FBI office. (The plot is also referenced in a second document obtained in PCJF’s FOIA response, in this case from the FBI’s Gainesville, Fla., office, which cites the Houston FBI as the source.) That second document actually suggests that the assassination plot, which never was activated, might still be operative should Occupy decisively re-emerge in the area. It states:

On 13 October 20111, writer sent via email an excerpt from the daily [DELETED] regarding FBI Houston’s [DELETED] to all IAs, SSRAs and SSA [DELETED] This [DELETED] identified the exploitation of the Occupy Movement by [LENGTHY DELETION] interested in developing a long-term plan to kill local Occupy leaders via sniper fire.

Asked why solid information about an assassination plot against American citizens exercising their Constitutional right to free speech and assembly never led to exposure of the plotters’ identity or an arrest—as happened with so many other terrorist schemes the agency has publicized—Paul Bresson, head of the FBI media office, offered a typically elliptical response:

The FOIA documents that you reference are redacted in several places pursuant to FOIA and privacy laws that govern the release of such information so therefore I am unable to help fill in the blanks that you are seeking. Exemptions are cited in each place where a redaction is made. As far as the question about the murder plot, I am unable to comment further, but rest assured if the FBI was aware of credible and specific information involving a murder plot, law enforcement would have responded with appropriate action.

Note that the privacy being “protected” in this instance (by a government that we now know has so little respect for our privacy) was of someone or some organization that was actively contemplating violating other people’s Constitutional rights— by murdering them. That should leave us less than confident about Bresson’s assertion that law enforcement would have responded appropriately to a “credible” threat.

Houston Cops Not Warned?

The Houston FBI office stonewalled our requests for information about the sniper-rifle assassination plot and why nobody was ever arrested for planning to kill demonstrators. Meanwhile, the Houston Police, who had the job of controlling the demonstrations, and of maintaining order and public safety, displayed remarkably little interest in the plot: “We haven’t heard about it,” said Keith Smith, a public affairs officer for the department, who told us he inquired about the matter with senior department officials.

Asked whether he was concerned that, if what he was saying was correct, it meant the FBI had not warned local police about a possible terrorist act being planned in his city, he said, “No. You’d have to ask the Houston FBI about that.”

Craft International Again

Sniper action by law enforcement officials in Texas would not be anything new. Last October, a border patrol officer with the Texas Department of Public Safety, riding in a helicopter, used a sniper rifle to fire at a fast-moving pickup truck carrying nine illegal immigrants into the state from Mexico, killing two and wounding a third, and causing the vehicle to crash and overturn. It turns out that Border Patrol agents, like a number of Texas law enforcement organizations, had been receiving special sniper training from a Dallas-based mercenary-for-hire organization called Craft International LLC. It seems likely that Houston Police have also received such training, possibly from Craft, which has a contract for such law-enforcement training funded by the US Department of Homeland Security.

Efforts to obtain comment from Craft International have been unsuccessful, but the company’s website features photos of Craft instructors training law enforcement officers in sniper rifle use (the company was founded in 2009 by Chris Kyle, a celebrated Navy SEAL sniper who last year was slain by a combat veteran he had accompanied to a shooting range). A number of men wearing Craft-issued clothing and gear, and bearing the company’s distinctive skull logo, were spotted around the finish line of the April Boston Marathon, both before and after the bombing. Some were wearing large black backpacks with markings resembling what was seen on an exploded backpack image released by the FBI.(For more on the backpacks that allegedly contained the bombs, see this piece we did in May.)

An Activist Responds

Remington Alessi, an Occupy Houston activist who played a prominent role during the Occupy events, was one of the seven defendants whose felony charge was dropped because of police entrapment. He says of the sniper plot information, which first came to light last December as one of hundreds of pages of FBI files obtained by PCJF, “We have speculated heavily about it. The ‘if deemed necessary’ phrase seems to indicate it was an organization. It could have been the police or a private security group.”

Alessi, who hails from a law-enforcement family and who ran last year for sheriff of Houston’s Harris County on the Texas Green Party ticket, garnering 22,000 votes, agrees with attorney Kennedy that the plotters were not from some right-wing organization. “If it had been that, the FBI would have acted on it,” he agrees. “I believe the sniper attack was one strategy being discussed for dealing with the occupation.” He adds:

I assume I would have been one of the targets, because I led a few of the protest actions, and I hosted an Occupy show on KPFT. I wish I could say I’m surprised that this was seriously discussed, but remember, this is the same federal government that murdered (Black Panther Party leader) Fred Hampton. We have a government that traditionally murders people who are threats. I guess being a target is sort of an honor.

There, Alessi is referring to evidence made public in the Church Committee hearings of the 1970s which revealed that the FBI was orchestrating local police attacks (in Chicago, San Francisco and New York) on Panther leaders. (For more on that, see this, starting at p. 185, esp. pp. 220-223; also see this .)

Alessi suspects that the assassination plot cited in the FBI memo was probably developed in the Houston Fusion Center (where federal, state and local intelligence people work hand-in-glove). During our trial we learned that they were all over our stuff, tracking Twitter feeds etc. It seems to me that based on the access they were getting they were using what we now know as the NSA’s PRISM program.

He notes, correctly, that in documents obtained from the FBI and Homeland Security by the PCJF’s FOIA search, the Occupy Movement is classed as a “terrorist” activity.

Ironically, while the Occupy Movement was actually peaceful, the FBI, at best, was simply standing aside while some organization plotted to assassinate the movement’s prominent activists.

The FBI’s stonewalling response to inquiries about this story, and the agency’s evident failure to take any action regarding a known deadly threat to Occupy protesters in Houston, will likely make protesters at future demonstrations look differently at the sniper-rifle equipped law-enforcement personnel often seen on rooftops during such events.

What are they there for? Who are the threats they are looking for and potentially targeting? Who are they protecting? And are they using “suppressed” sniper rifles? Would this indicate they have no plans to take responsibility for any shots silently fired? Or that they plan to frame someone else?

It seems that whoever their teachers were, our defense establishment has learned its lessons well.

(Please consider making even a small contribution to the Welcome to Pottersville2 Quarterly Fundraiser happening now ($5.00 is suggested for those on a tight budget) or sending a link to your friends if you think the subjects discussed here are worth publicizing. Thank you for your support. We really appreciate it. Anything you can do will make a huge difference in this blog's ability to survive in these difficult economic times.)

Gee, if only other people ever addressed history as so revealing of today's dilemmas. Turns out that Texas still wins the poll as the easiest state in which to take advantage of idiots. Although Alan Greenspan runs a close second.

Pay close attention to this detail (if you've got a moment of patience left) as it makes the difference in understanding what the financial future of the 99% will be if the banksters are permitted to continue to talk around the pertinent issues again (attributed to the nebulosity of the past gleeful bankster chicanery). Yes, it could be seen as a slog. But it's your money so you takes your chances. (Sorry it's so long, but it's full of goodness (badness, so brace yourself!)).

On a personal note, I was studying Economics at Hopkins during the early 80's and wrote many papers (which several profs lauded as "brave") on how unbelievable the world of banking had become, with especial notice to the Reagan Deregulation Regime: Alan Greenspan having finally arrived as sublime hoist on his own petard.

It's good to know that almost everyone understands my early concerns now.

That's almost a joke (if it weren't so important to almost everyone's future).

And they all who took part in that charade should be in jail now.

For a very long time.

In order to serve as the bad example(s) for others.

A cautionary tale.

I have no doubt that any of this mayhem stemmed from ignorance or confusion.

Raj Chetty has written an op ed in the New York Times designed to counter the abuse the Sveriges Riksbank (Sweden’s central bank) rightly received for its latest embarrassment. Economics does not have a true Nobel Prize, so a central bank decided to create a near-beer variant. The central bankers have frequently made a hash of it, often awarding economists who got it disastrously wrong and inflicted policies that caused immense suffering.

This year, not for the first time, the central bankers decided to hedge their bets – awarding their prize to economists who contradict each other (Eugene Fama and Robert Shiller). The hedge strategy might be thought to ensure that the central bank’s prize winners were right at least half the time (which would be an improvement over the central bankers’ batting average in their awards), but that is a logical error. It is perfectly possible for both of the prize winners to be wrong. I’ll explain why I think that is the case in a future article.

In this article I respond to Chetty’s effort to defend economists from the ridicule that the most recent Riksbank award prompted. Chetty is professionally embarrassed by that ridicule.

The first words of his article are: “CAMBRIDGE, Mass. — THERE’S an old lament about my profession: if you ask three economists a question, you’ll get three different answers.” Chetty’s “old lament” is accurate, but incomplete. The “economist’s lament” has many verses.

If you ask three economists a question, you’ll get three different answers

The three answers will be opinions driven by the economists’ ideologies

The answers will ignore the relevant multidisciplinary literature

The answers will ignore the relevant economics literature that challenges the answers

The answers will arise from studies that fail basic requisites of the scientific method, e.g., they will implicitly assume that alternative causes do not exist

The empirical methodology used to support the answers will often be so biased that it seems to support answers that are the opposite of reality

The economists frequently water board their data until they seem to confess the answer that comports with the economist’s dogmas

All three answers are wrong, horribly wrong

The policies that the economists recommend on the basis of their ideologies and tortured data are often destructive and they breed complacency by assuming away critical risks

The policies that the economists recommend often produce unanticipated consequences that prove even more destructive

The economists are blind to conflicts of interest and eagerly seek out such conflicts to enrich themselves

The economists are blind to ethics, even disdainful of it

The economists will rarely admit that they were wrong and reconsider their dogmas

Chetty’s effort to defend economists was less than robust. He did not defend the answers economists reach as being the product of science. Instead, he argued that economists should not be mocked by real sciences because economists would really, really like to be scientists.

“But the headline-grabbing differences between the findings of these Nobel laureates are less significant than the profound agreement in their scientific approach to economic questions, which is characterized by formulating and testing precise hypotheses. I’m troubled by the sense among skeptics that disagreements about the answers to certain questions suggest that economics is a confused discipline, a fake science whose findings cannot be a useful basis for making policy decisions.”

Chetty thinks critics who point out that economists don’t achieve science even though they purport to aspire to it are “unfair and uninformed.”

“That view is unfair and uninformed. It makes demands on economics that are not made of other empirical disciplines, like medicine, and it ignores an emerging body of work, building on the scientific approach of last week’s winners, that is transforming economics into a field firmly grounded in fact.”

Again, Chetty’s idea of a defense reads more like a petulant confession of failure. We are supposed to be impressed that, in late 2013, economics is seeking to “transform” itself “into a field firmly grounded in fact.” A science does not have “transform” into a science. Economists could have modeled the scientific method for well over a century. A large minority of economists continue to urge us to inflict austerity in response to a Great Recession – the equivalent of pre-scientific “medicine” bleeding sick patients.

Chetty then tells us what he believes is the core problem with economics and why economists are finally “transforming” economics into a reality-based field.

“As is the case with epidemiologists, the fundamental challenge faced by economists — and a root cause of many disagreements in the field — is our limited ability to run experiments. (Surely we don’t want to create more financial crises just to understand how they work.) Nonetheless, economists have recently begun to overcome these challenges by developing tools that approximate scientific experiments to obtain compelling answers to specific policy questions.”

Chetty’s parenthetical says it all, for economists have “create[d] more financial crises” precisely because they do not “understand how they work” yet they dogmatically insist on policies that prove ever more criminogenic. Economists would understand how they work if they actually followed the scientific method.

Chetty’s statement that economics is “transforming” into a “science” based on “facts” because economists have “begun” to study “natural experiments” is as bizarre as it is inaccurate.

I was taught over 40 years ago by my economics and statistics professors to study natural experiments and none of my teachers suggested that the methodology was novel. I was taught the same thing in criminology 20 years ago. As regulators we successfully used natural experiments for “testing precise hypotheses.” In analyzing the causes of the current crisis I have repeatedly emphasized the usefulness of the natural experiment provided by “liar’s” loans for “testing precise hypotheses.”

As I explain below, neo-classical economists studied natural experiments 30 years ago during the S&L debacle.The difference is that the economists’ dogmas caused them to implicitly constrain the range of alternative hypotheses to exclude accounting control fraud as a candidate explanatory variable.

As regulators, we did not arbitrarily constrain potential explanatory variables by excluding fraud. The result is that we got it right and the economists got it as wrong as it is possible to get something wrong.

Testing natural experiments is a fine idea that all social sciences embraced decades ago. It is bizarre and inaccurate for Chetty to claim that it is novel and that it produces “science.” It can help and it can hurt depending on how well it is conducted. It is one important methodology, not the holy grail of scientific methodology for economics or criminology.

I will discuss several examples of why Chetty’s “scientific experiments” have repeatedly produced what economists assured us were “compelling answers to specific policy questions” that were disastrously wrong. It turns out that the scientific method that economists purport to embrace is frequently the thinnest of fancy veneers hiding a core composed of the cheapest pressboard. Economists who study fields beset by financial frauds, for example, are overwhelmingly betrayed by ideology and conflicts of interest.

Economists do not study fraud. They have a primitive tribal taboo against using the word. This, of course, is because economics is assuredly not “firmly grounded in fact.”

Ignoring fraud is a pure ideological construct that requires economists to ignore fraud, particularly private-sector “control fraud.” Economists do not study the criminology literature on elite white-collar crimes. Economists do not study and do not understand sophisticated financial fraud schemes.

I will briefly mention five examples during the savings and loan debacle. Richard Pratt, an academic economist who was Chairman of the Federal Home Loan Bank Board, exploited a series of natural experiments to study which state-chartered S&Ls reported the highest income. The answer was Texas.Pratt, the architect of the deregulation bill that became law as the Garn-St Germain Act of 1982, used Texas’ deregulation law as the model for the Garn-St Germain Act.

Alan Greenspan, having studied the natural experiment provided by S&Ls following different investment strategies praised Charles Keating’s Lincoln Savings as the exemplar that should be the model for the industry because Lincoln Savings reported record profits. Greenspan assured the federal regulators that Lincoln Savings “posed no foreseeable risk of loss.”

Daniel Fischel, exploiting a similar natural experiment, praised Lincoln Savings as the Nation’s best S&L. He also praised CenTrust as a superb S&L. In each case the basis for his conclusion was the extreme income reported by the S&L.

George Benston used a natural experiment by studying state-chartered S&Ls that had made large amounts of “direct investments” that the federal regulators were proposing to restrict. He found that such S&Ls reported substantially higher income than other S&Ls.

James Barth studied a natural experiment provided by failed S&Ls and concluded that their owners must have been honestly gambling for resurrection because as the S&Ls approached failure they increasingly invested in high risk assets. Barth was the regulatory agency’s head economist.

The common denominators in these five examples are that the economists implicitly assumed accounting control fraud out of existence and as a result their conclusions were false. The “recipe” for accounting control fraud by a lender has four ingredients.

Grow extremely rapidly by

Making enormous numbers of bad quality loans at a premium yield while

Employing extreme leverage and

Providing only trivial allowances for loan and lease losses (ALLL)

The recipe produces three “sure things.”The lender is guaranteed to report record income in the near term, the senior officers will be made immediately wealthy by modern executive compensation, and the lender will eventually suffer severe losses. Texas led the Nation in accounting control fraud because it deregulated and desupervised, so its S&Ls reported the highest (fictional) profits and suffered the worst losses.

Pratt’s use of Texas as the model for deregulation was the worst possible choice and caused catastrophic harm.

Greenspan’s assurance that Lincoln Savings posed no foreseeable risk of loss proved incorrect – it caused the largest loss to a federal deposit insurance fund in history. It was impossible for Greenspan to make a larger error when writing about a single institution.Fischel praised the worst, most fraudulent S&L in the Nation as the best S&L. He made a 3,000 position error in an industry with 3,000 positions. It is impossible to get it more wrong.

CenTrust was also a massive accounting control fraud that caused roughly $1 billion in losses.

Benston praised roughly 33 S&Ls that made large amounts of direct investments – they all failed. They were overwhelmingly accounting control frauds. It is impossible in a sample size of 33 to bat worse than 0 for 33. Greenspan, Fischel, and Benston shared another characteristic that helps explain the astonishing extent of their errors – Lincoln Savings paid for their research.Barth did agree that control fraud existed, but he missed the fact that firms following the fraud recipe will invest heavily in high risk assets but they will do so in a manner that demonstrates that they are engaged in accounting control fraud rather than honest gambles. George Akerlof and Paul Romer’s 1993 article (“Looting: The Economic Underworld of Bankruptcy for Profit”) explained this point in detail.

“[M]any economists still [do] not understand that a combination of circumstances in the 1980s made it very easy to loot a [bank] with little risk of prosecution. Once this is clear, it becomes obvious that high-risk strategies that would pay off only in some states of the world were only for the timid. Why abuse the system to pursue a gamble that might pay off when you can exploit a sure thing with little risk of prosecution?”

[S]omeone who is gambling that his thrift might actually make a profit would never operate the way many thrifts did, with total disregard for even the most basic principles of lending: maintaining reasonable documentation about loans, protecting against external fraud and abuse, verifying information on loan applications, even bothering to have borrowers fill out loan applications” (Akerlof & Romer 1993: 4-5).

Akerlof and Romer made this passage their concluding paragraph in order to gives special emphasis to the message to their field.

“Neither the public nor economists foresaw that [S&L deregulation was] bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself” (George Akerlof & Paul Romer1993: 60).

Economists overwhelmingly supported the deregulation of S&Ls. Larry White’s famous phrase was that there were “no ‘Cassandras’” in his field who warned that deregulation would produce a disaster.

Economists overwhelmingly and vociferously opposed our reregulation of the S&L industry (claiming we were economically illiterate).

Economists did not provide us with “lukewarm support” – they were our leading opponents in our successful effort to contain the epidemic of accounting control fraud that drove the crisis.

Chetty denied the problem, but the “facts” are what demonstrate that economists as a field performed during the S&L debacle as “a fake science whose findings cannot be a useful basis for making policy decisions.” In every case the policies that proved disastrous were based on precisely the econometric practices that Chetty claimed were “transforming” his field into a “science.”

George Akerlof received the Riksbank award in 2001. The Akerlof work that the award committee singled out for praise was his 1970 article on markets for “lemons” in which he explained anti-purchaser control frauds in which the seller deceives the purchaser about the quality of the goods or services. Akerlof (1970) and Akerlof and Romer (1993) both studied natural experiments.

Chetty’s article disses economists who are theorists and praises quants. He mentions two theorists, Paul Krugman and Janet Yellen (both of whom have done extensive quantitative research) in a manner that implies that they are primitives who have missed the field “transforming” into a “science” based in “facts” – Paul Krugman and Janet Yellen.

Krugman is another recipient of the Riksbank prize and Yellen is President Obama’s nominee to run the Federal Reserve (and Akerlof’s spouse). If Chetty’s dichotomy between theorists and scientists were true, we would have to wonder why economics continues to bestow its top honors on economists whose work is not scientific because it is not “firmly grounded in fact.” But Chetty’s dichotomy is false. He is simply engaged in the highly scientific practice of a Harvard prof dissing his more prestigious peers who have taught at Princeton and Berkley.

Akerlof and Romer exposed the most fundamental problem with Chetty’s theory of the scientific method. Fact and theory are both vital. If economists’ dogmas and mono-disciplinary blinders prevent them from understanding that control fraud exists, then Chetty’s supposed recipe for science – “formulating and testing precise hypotheses” – will consistently produce failed empirical studies that economists will interpret as supporting policies that cause our recurrent, intensifying financial crises. Good theory is essential to constructing good empirical studies.

Akerlof and Romer worked closely with a financial regulator (me) in drafting their famous article. That meant that they had the advantage of being firmly grounded in fact and a wealth of multi-disciplinary learning (including white-collar criminologists whose work I was drawing on) – an advantage that Akerlof and Romer enthusiastically welcomed.

Note that Akerlof and Romer rightly stressed other forms of learning that proved far superior to “scientific” economists precisely because the examiners exemplify the concept of learning that is “firmly grounded in fact.” Akerlof and Romer praised “the regulators in the field who understood what was happening from the beginning….”

Chetty has conflated “data” with “facts.” Accounting control fraud produces fraudulent accounting data that economists and finance scholars treat (implicitly) as facts. During the expansion phase of a bubble or an expanding epidemic of accounting control fraud the traditional econometric study will lead the “scientific” economist to support the worst possible policies that most aid accounting control fraud.

Whatever practices best facilitate the creation of fictional income will show the highest positive correlation with the firm’s reported income (or stock price). The true (negative) “sign” of the correlation will only emerge after the bubble bursts or years after the fraud epidemic begins.By then, of course, it is too late to prevent the crisis brought on by the “scientific” economists’ disastrously bad policy recommendations.

Note how pernicious this methodological failure is when combined with neo-classical economists’ insistence that it be made unlawful to adopt regulations until the regulators can produce data demonstrating that the benefits of the new rule would outweigh the costs. The D.C. Circuit, controlled by ultra-conservative law and economics devotees is using this as the pretext to block the SEC from adopting vital regulations.

The D.C. Circuit has effectively resurrected the discredited anti-regulatory “substantive due process” abuses that the judiciary abused 80 years ago.

Chetty is a mono-methodologist. Only quant work is “scientific.” Other social sciences that use multiple research methodologies, e.g., criminology, must not be “scientific.” Chetty’s view of the scientific method represents dogma and personal predilections rather than science.

Competent bank examiners never forget that accounting data can be the product of accounting control fraud. Examiners produce the equivalent of hundreds of detailed case studies that can be examined rigorously for common characteristics. It was our “autopsies” of every failed S&L that led to our development of the concept of control fraud and the subset we now call accounting control fraud. The autopsies led to our identification of the fraud “recipe” for a lender.

We consistently studied natural experiments to test precise hypotheses in order to formulate the radical policy changes that contained the epidemic of accounting control fraud that drove the second phase of the S&L debacle. But we did more that test hypotheses – we formulated theories such as the concepts of control fraud and accounting control fraud and the fraud recipe.

We synthesized a theory of control fraud, building it from economics, law, criminology, accounting, governance, and political science. We built in many economic concepts that proved immensely useful. We stressed the perverse incentives arising from “agency” problems in corporations and how modern executive compensation aggravates the incentives, allows the CEO leading the control fraud to signal other officers on the practices they should follow to aid the fraud, and serves as a means to loot the firm.

We realized that the decline of financial partnerships with “joint and several liability” greatly increased agency problems by eroding “private market discipline.” We understood how the CEOs manipulated professional compensation to create a “Gresham’s” dynamic that drove good ethics from professions and markets. The art was for the CEO to suborn purported “controls” and pervert them into fraud allies.

The professionals’ reputation aided the fraud scheme. We understood that markets were frequently deeply inefficient because the fraud recipe made reporting record profits a “sure thing.”Banks do not create private market discipline – they fund the massive growth of firms that report record profitability due to the fraud recipe.

We realized that lenders following the recipe had to gut their underwriting standards and suborn their internal controls. We used this to identify the frauds while they were still reporting record profits. We understood that these practices created intense “adverse selection” and meant that the lending had a “negative expected value” at the time they were made.

We determined that the recipe was a superb means of hyper-inflating a financial bubble and realized the significance of the industry expression “a rolling loan gathers no loss.” We developed a superior understanding of “moral hazard” and the nearly universal practice of economists implicitly assuming control fraud out of existence and assuming that moral hazard led solely to honest gambles.

Understanding the recipe allowed us to identify the worst accounting control frauds at an early point while they were still reporting record profits. The recipe also allowed us to target the frauds’ Achilles’ “heel” – the need to grow extremely rapidly. Our rule restricting growth doomed even the S&L control frauds we could not close promptly because we lacked the funds.

As S&L regulators, we made our top supervisory priority the S&Ls reporting the highest income. Economists viewed this as proof that we were economically illiterate. Charles Keating famously sent a letter to much of the Nation’s political leadership on July 8, 1986 that specifically attacked us for this prioritization. The letter calls us “Nazi” and then cheerfully mixed its sensational similes by concluding that our policy was “like Jupiter eating his children.”

Bank Board Chairman Edwin Gray began S&L reregulation in 1983 – the year after the Garn-St Germain Act implemented federal deregulation and triggered a regulatory “race to the bottom” among state regulators.

By 1984, there were 300 S&L control frauds growing at an average annual rate of 50 percent. It is only with the benefit of hindsight informed by our experience with the current crisis that we can now understand how incredibly valuable it was that Gray began the reregulation of the industry so promptly.

The reregulation was done in the teeth of vicious opposition from the Reagan administration, James Wright, Jr., the Speaker of the House, a majority of the members of the House, the five U.S. Senators who became known as the “Keating Five,” every outside economist who expressed an opinion, the industry, and the business media.

It soon rendered Gray unemployed and unemployable for over two decades. Absent that prompt reregulation, resupervision, and beginning criminal referrals and prosecutions the S&L debacle would have become vastly more damaging. In retrospect we can see that good regulatory theory saved trillions of dollars and that bad economic studies that followed Chetty’s claims of proper scientific method would have led to terrible policies that would have added trillions of dollars of losses had we (the S&L regulators) not countered the studies and followed the opposite policies.

The advantages of good theory were demonstrated in 1990-1991 during the S&L debacle when the control frauds opened a second “front” in Orange County, California (where all good U.S. financial fraud epidemics begin). The primary “ammunition” used for accounting fraud during the debacle was commercial real estate loans. Orange County control frauds began to make significant amounts of what are now called “liar’s” loans.

They had no such warning label in this era. We were the regional regulators with jurisdiction over Orange County S&Ls and we listened to our examiners. Our examiners stressed that no honest mortgage lender would make such loans without underwriting key information such as the borrower’s income. Absent such underwriting, a mortgage lender creates severe adverse selection and the lending has a negative expected value. In plainer English, the lender will lose money.

Liar’s loans do, however, make sense for an accounting control fraud. We drove liar’s loans out of the S&L industry. We did this while heavily occupied dealing with the overall S&L debacle. It was one of the easiest supervisory calls we ever made.

Again, the current crisis, which was driven principally by an epidemic of fraudulent liar’s loans, allows us to understand for the first time how much this regulatory crackdown on liar’s loans in 1990-1991 saved the Nation and the world trillions of dollars in losses.

The current crisis could not have grown to such epic proportions absent the anti-regulatory studies and theories of economists that regulatory leaders adopted under the Clinton and Bush administration.

These theories implicitly taught that control fraud did not exist because markets must be self-correcting to be efficient. The crisis could not have occurred without ignoring the findings and experience of competent regulators, industry experience, criminologists, and Akerlof and Romer.

The tragedy, however, is that economists’ anti-regulatory, pro-corporate biases have proven so all-consuming that most economists are so anti-scientific that they have refused to learn from the control fraud epidemics that drive our recurrent, intensifying financial crises.

The industry and the regulators during this crisis had the advantage of our crackdown on liar’s loans and the fact that the industry was now calling the loans “liar’s” loans.

There was no subtlety to this first aspect of the loan origination fraud epidemic. No government agency or law required or recommended that lenders make liar’s loans. But economists also had the advantage of Akerlof and Romer’s 1993 article about “looting.”

Akerlof and Romer’s general point that accounting control fraud existed and could drive crises and the admonition that now we (economists) know better and that if we learn from the looting we need not suffer a recurrence of the crises should have alerted every economist to the danger.

Even better, the article specifically warned that we could recognize the frauds by looking for lenders that failed in “maintaining reasonable documentation about loans, protecting against external fraud and abuse, verifying information on loan applications, even bothering to have borrowers fill out loan applications.”

They warned their field against the specific fraud scheme that drove the current crisis – a full decade in advance.Their article also warned about fraudulent lenders exploiting loan brokers’ perverse incentives to originate bad loans and then sell the loans in the secondary market (1993: 29, 46).

Economists did not simply fail to warn about the fraud epidemics – they recommended doubling down on the criminogenic policies (the three “de’s” – deregulation, desupervision, and de facto decriminalization) that Akerlof and Romer warned were “bound to produce looting.” Economists, in the rare cases where they mentioned fraud, claimed that fraud posed no risk in “sophisticated” financial markets. Complacency is one of the most destructive mindsets a regulator can have.

I have explained in depth the lead role that fraudulently originated liar’s loans played in driving the crisis. The brief summary is that the incidence of fraud in liar’s loans, according to the industry’s own anti-fraud experts was 90 percent. The massive expansion of liar’s loans caused the bubble to hyper-inflate.

Liar’s loans grew by roughly 500% from 2003-2006. By 2006, roughly half the loans that the industry called “subprime” were also liar’s loans (the two categories are not mutually exclusive) and about 40% of all home mortgage loans originated in 2006 were liar’s loans. In 2006 alone, the industry originated over two million fraudulent liar’s loans.

The other aspect of the loan origination fraud epidemic, appraisal fraud, was even more blatant.

“From 2000 to 2007, a coalition of appraisal organizations … delivered to Washington officials a public petition; signed by 11,000 appraisers…. [I]t charged that lenders were pressuring appraisers to place artificially high prices on properties [and] “blacklisting honest appraisers” and instead assigning business only to appraisers who would hit the desired price targets” ( FCIC 2011: 18).

The petition was corroborated by two surveys of appraisers. A survey in 2003 found that 55% of appraisers reported being coerced to inflate at least one appraisal that year. A repeat of the survey in 2007 found that the percentage that had experienced coercion that year had risen to 90 percent. Sixty-eight percent of appraisers reported having lost a client and 45% reported that they were not paid for their work when they resisted coercion.

Demos published a study in 2005 that reported that appraisal fraud had become “epidemic.” Then New York Attorney General Cuomo reported that his investigation had confirmed that Washington Mutual (WaMu) had blacklisted appraisers who refused to inflate appraisals and that this practice was the norm for the industry.

The mortgage lending industry and the regulators could have figured out everything necessary to prevent the crisis had they understood accounting control fraud and the import of the petition. Here are the key conclusions that the industry and regulators should have drawn.

Lenders and their agents are causing inflated appraisals

Appraisal fraud had become epidemic

No honest lender would inflate appraisals or allow them to be inflated

The lenders’ strategy is to generate a Gresham’s dynamic and suborn appraisers

There is no fraud exorcist, so the fraudulent loans are sold fraudulently

The MBS and CDO are backed by fraudulently inflated appraisals

Individually, each of the three control fraud epidemics (liar’s loans, appraisals, and secondary market sales through fraudulent “reps and warranties”) would have represented the most destructive financial frauds in world history. Collectively, they caused catastrophic, global damage and unprecedented fraudulent enrichment of the officers that led the control frauds.

As remarkable as the near total failure of economists to “know better” about twin loan origination fraud epidemics that we had seen, and successfully suppressed before, the truly remarkable demonstration of how self-destructive economists’ dogmas are of their ability to go beyond a shambolic parody of the scientific method is their work after the crisis that purports to explain what caused the crisis.

In virtually all cases (1) they never consider the possibility of accounting control fraud, (2) they do not discuss or even cite Akerlof and Romer 1993, and (3) they do not discuss the relevant criminology literature. They purport to use natural experiments “testing precise hypotheses” but they implicitly exclude accounting control fraud as a possibility. Because the exclusion is implicit, it is not supported by reasoning. Indeed, it is unlikely that the researchers consciously know that they have excluded control fraud.

Ideology and mono-disciplinary blinders consistently trump the scientific method. We have the worst of all worlds because the researchers believe they are the very model of the modern scientific economist while the reality is that they are in thrall to their dogmas, which implicitly censor out alternative theories of causation that would falsify their ideologies

To gleefully mix Gilbert and Sullivan tunes, the economists that Chetty praises became the equivalent of admirals in their field because they stuck close to their desks and never went to sea to battle the three most devastating epidemics of financial fraud in world history.

I’ll end with one such example, of over a hundred. I picked it because it explicitly discusses liar’s loans at one of the large accounting control frauds, Bear Stearns (Bear). It is a 2009 study entitled “Taking the Lie Out of Liar Loans.”

The researchers studied loans made by Bear and its affiliates. They explain that Bear’s mortgage loan originations became increasingly dominated by liar’s loans. The authors do not attempt to explain why Bear’s leadership chose to increasingly originate overwhelmingly fraudulent loans that the industry called “liar’s” loans. The article exemplifies economists’ tribal taboo about the frightening power of the “f” word. An article focused on fraudulent loans never uses the word “fraud.”

The article never cites Akerlof and Romer (1993), the relevant criminology literature on control fraud, or the fact that the other two modern financial crises (the S&L debacle and the Enron-era scandals) were driven by epidemics of accounting control fraud. It ignores our 1990-1991 experience with liar’s loans.

The article implicitly assumes that accounting control fraud by lenders cannot exist – even when lenders employ a type of loan that they know will produce endemically fraudulent loan originations. Indeed, Bear massively increased its liar’s loans knowing that they were frequently fraudulent.

The authors’ seemingly sensible, but actually bizarre presumption underlying the article is that they are developing a proposed means of underwriting to reduce the fraud incidence of inflated borrowers’ incomes in liar’s loans. The obvious, except to economists, analytical point that explains why the authors’ presumption is bizarre is that lenders have known for centuries how to underwrite home loans in a manner that reduces fraud by borrowers to trivial levels.

The officers controlling fraudulent home lenders created the perverse compensation systems of loan officers and loan brokers and enthusiastically embraced endemically fraudulent liar’s loans because they did not wish to engage in effective underwriting. Effective underwriting would prevent them from attaining the “sure things” offered by the fraud recipe.

The authors’ crude underwriting substitute could not reduce fraud remotely as effectively as real underwriting. Neither fraudulent nor honest officers would use the authors’ underwriting substitute. The fraudulent officers did not want to exclude bad loans and honest officers would have found the authors’ underwriting substitute grossly inferior to real underwriting.

Using euphemisms for fraud, the authors repeatedly confirm the endemic inflation of the borrower’s income in liar’s loans. In no case, however, do they even consider that the officers controlling the lender could have been engaged in accounting control fraud.

The closest they come was to note that a journalist assumed that liar’s loans were actually profitable to the lender because “lenders may have incentives to encourage brokers to solicit stated-income loans because such loans may produce ‘excessive rates and penalties.’” The authors did not bother to analyze the journalist’s claim.

The authors also implicitly assumed appraisal fraud out of existence because they rely uncritically on reported “loan-to-value” (LTV) ratios. In one case the authors note the possibility that the “the borrower (and/or broker) may have exaggerated income to qualify for a loan that is greater than they can really aﬀord.”

The possibility that the officers controlling the lender knew that brokers and loan officers would encourage or even directly cause the inflation of the borrower’s income pursuant to the fraud “recipe” was ignored.

In eight places in their article the authors assumed that it was solely the borrowers who must be inflating their incomes and implicitly assumed that the lender’s controlling officers would have been determined to prevent such frauds. The authors ignored all the investigators who testified that it was lenders and their agents that put the lies in liar’s loans and all the warnings to the lenders that liar’s loans were endemically fraudulent (I have detailed these in prior articles).

The mono-disciplinary authors emphasize that they were the first to study the effect of liar’s loans on loan defaults (by which they mean the first economists to study). Consider how crazy that is for a field that pretends to science. The biggest development in real estate, by far, was the rise of nonprime loans, particularly liar’s loans and most particularly subprime liar’s loans. The context was that even many economists were warning about a massive housing bubble.

The rise in liar’s loans was so rapid from 2003-2006 that they were the marginal loan driving the bubble to hyper-inflate. The Federal Reserve’s supervisors were so worried about the spread of non-prime loans that, despite Greenspan’s disapproval they conducted an exceptionally limited inquiry into the largest banks’ origination of non-traditional mortgages.

“Sabeth Siddique, the assistant director for credit risk in the Division of Banking Supervision and Regulation at the Federal Reserve Board, was charged with investigating how broadly loan patterns were changing. He took the questions directly to large banks in 2005 and asked them how many of which kinds of loans they were making. Siddique found the information he received ‘very alarming,’ he told the Commission.

In fact, nontraditional loans made up 59 percent of originations at Countrywide, 58 percent at Wells Fargo, 51 at National City, 31% at Washington Mutual, 26.5% at CitiFinancial, and 28.3% at Bank of America. Moreover, the banks expected that their originations of nontraditional loans would rise by 17% in 2005 to 608.5 billion.

The review also noted the ‘slowly deteriorating quality of loans due to loosening underwriting standards.’ In addition, it found that two-thirds of the nontraditional loans made by the banks in 2003 had been of the stated-income, minimal documentation variety known as liar loans, which had a particularly great likelihood of going sour.

The reaction to Siddique’s briefing was mixed. Federal Reserve Governor Bies recalled the response by the Fed governors and regional board directors as divided from the beginning. ‘Some people on the board and regional presidents . . . just wanted to come to a different answer. So they did ignore it, or the full thrust of it,’ she told the Commission.

Within the Fed, the debate grew heated and emotional, Siddique recalled. ‘It got very personal,’ he told the Commission. The ideological turf war lasted more than a year, while the number of nontraditional loans kept growing….” (FCIC 2011: 20-21).

The Fed is dominated by neo-classical economists. What was the reaction of many of the Fed’s senior economists to the facts of mortgage lending? They were enraged at their own supervisory messengers.

It was just data – supplied by the biggest banks – yet because it was counter to their dogmas the reaction was “emotional” and “heated” and directed against the supervisors rather than the banks. The telling phrase about dogma is that opponents of supervision “wanted to come to a different answer. So they did ignore [the data].” The Fed is supposed to be the high temple of the quants that Chetty claims are transforming economics into a science.

But here is the real takeaway about economists and their pretensions to be scientists.

The Fed employs hundreds of economists who are supposed to study important economic developments. There were no more important micro-foundational developments than the three mortgage fraud epidemics and the hyper-inflated bubble that they produced.

The Fed’s economists, according to the authors of the study I have been discussing, failed to study the four developments that were about to cause a catastrophe. To make it worse, only the Fed had the authority under the Home Ownership and Equity Protection Act of 1994 (HOEPA) to ban all liar’s loans and the Fed held a series of hearings mandated by Congress at which there was extensive testimony about liar’s loans.

The Fed’s economists, therefore, should have made studying the three mortgage fraud epidemics and the resultant bubble their highest research priority. That’s what scientists would have done.

But those studies would have produced results that would have devastated the dogmas that rule the Fed’s economists. The effectiveness of those ideological blinders in preventing serious research on the frauds by the Fed’s economists continues to this day. This is a very old story.

Michael Jensen, when he was the managing editor of the Journal of Financial Economics, discovered that no proposed article could get through peer review if it challenged the efficient market hypothesis. Jensen was a strong supporter of EMH, but he was appalled by this triumph of dogma over science. He published an “anomalies” volume, though as he noted in the first volume each of the contributors professed belief in EMH.

The strength of Jensen’s endorsement for EMH, even when he discovered that his colleagues were ruled by their dogmas should be a cautionary tale with regard to Chetty’s claim that this time it’s different, this time economists will behave like scientists.

Jensen stated: “I believe there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Market Hypothesis.” If he is correct, then the costly collapse of EMH suggests that all other economic propositions rest on even shakier foundations built on friable dogma rather than bedrock facts.

The ranks of the world’s billionaires, as monitored and tallied by our global wealth team, have yet again reached all-time highs. The 2013 Forbes Billionaires list now boasts 1,426 names, with an aggregate net worth of $5.4 trillion, up from $4.6 trillion. We found 210 new ten-figure fortunes. Once again the U.S. leads the list with 442 billionaires, followed by Asia-Pacific (386), Europe (366), the Americas (129) and the Middle East & Africa (103).

Resurgent asset prices are the driving force behind the rising wealth of the super-rich around the globe. While last year almost as many fortunes fell as rose, this year gainers outnumbered losers by 4-to-1.

Gone are the days when U.S. billionaires accounted for over 40 percent of the list, with Western Europe and Japan making up most of the rest. Today, the Asia-Pacific region hosts 386 billionaires, 20 more than all of Europe and Russia combined.

. . . The figures offer a dramatic snapshot of the relative decline of the United States, Europe, and Japan in less than two decades and the stunning rise of Brazil, Russia, India, and China, as well as the rest of Asia. And, they remind us that countries where income was relatively equal twenty years ago, like China and Russia, have rushed into the ranks of the unequal.

Tuesday, October 29, 2013

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Even for Congress. They, and others who apparently don't study the facts, believe that Social Security is a government handout. But 'entitlement' means that people who have paid into a program all their lives are entitled to a reasonable return on their investment. A better definition, as pointed out by Mark Karlin at Truthout, is a "mandated retirement savings plan."

Cutting this popular and well-run and life-sustaining program would be irrational. There are many reasons for this.

1. Americans Have Paid For It Throughout Their Working Lives

As of 2010, according to the Urban Institute, the average two-earner couple making average wages throughout their lifetimes receives less in Social Security benefits than they paid in. It is the same for single males and same, by now, for single females. One-earner couples get back more than they paid in.

2. It's a Small Benefit, But Most Seniors Depend On It

The average Social Security benefit is less than $15,000 a year, but most of our seniors rely on this for the majority of their income. Even the second richest quartile of Americans depends on Social Security for over half of its retirement income.

3. It's Been Well-Run for Over Half a Century

The poverty rate has decreased dramatically over the past 50 years, in large part because of the benefits of the Social Security program.

Social Security is running on a surplus of $2.6 trillion, it's funded until 2037, it cannot run out of money, it cannot contribute to the deficit, it has lower administrative costs than private sector 401k retirement plans, and it's wildly popular.

On top of all this, a report by the AARP Public Policy Institute found that Social Security stimulates the economy, adding more than $1 trillion to the U.S. economy each year as recipients spend their benefits on goods and services.

Dean Baker calls Social Security "perhaps the greatest success story of any program in US history."

4. The Free-Market Alternative Doesn't Work

The free-market alternative is everybody for them. That's fine for people with good jobs and retirement plans. But stunningly, the number of private sector workers covered by a pension with a guaranteed payout has dropped from 60 percent to 10 percent in a little over thirty years.

Americans are going into debt faster than they're saving for retirement, and those able to put something aside often make wrong choices with their money.

Financial experts, who generally speak for the people with enough money to hire a financial expert, tell us to have $200,000 to $300,000 in personal retirement savings. Most Americans have about a tenth of that, less than $25,000.

5. Redistribution Has Moved Retirement Money from the Middle Class to the RichTax Expenditures -- subsidies from special deductions, exemptions, exclusions, credits, capital gains, and loopholes that move tax money to the richest taxpayers -- are estimated to be worth up to 8 percent of the GDP, or about $1.2 trillion.

Because of this misdirected revenue, government has been forced to borrow from Social Security to fund its programs. Most notably, George W. Bush took our retirement money to pay for his two wars and his tax cuts for the rich.

This last reason, more than any of the others, reveals the overwhelming unfairness of cutting Social Security.

In effect, the middle class is being told to replenish its own savings account after those savings were passed along to the military and the super-rich.

John Cusack and Maggie Gyllenhall stand in for US:

I haven't thought anything was safe online since I learned back in the 90's (early 90's) how large (and growing larger every year) the off-budget black ops projects were.

It’s my first class of the semester at New York University. I’m discussing the evils of plagiarism and falsifying sources with 11 graduate journalism students when, without warning, my computer freezes. I fruitlessly tap on the keyboard as my laptop takes on a life of its own and reboots. Seconds later the screen flashes a message. To receive the four-digit code I need to unlock it I’ll have to dial a number with a 312 area code. Then my iPhone, set on vibrate and sitting idly on the table, beeps madly.

I’m being hacked — and have only myself to blame.

Two months earlier I challenged Nicholas Percoco, senior vice president of SpiderLabs, the advanced research and ethical hacking team at Trustwave, to perform a personal “pen-test,” industry-speak for “penetration test.” The idea grew out of a cover story I wrote for Forbes some 14 years earlier, when I retained a private detective to investigate me, starting with just my byline. In a week he pulled up an astonishing amount of information, everything from my social security number and mother’s maiden name to long distance phone records, including who I called and for how long, my rent, bank accounts, stock holdings, and utility bills.

The detective, Dan Cohn, owned and operated Docusearch, a website that trafficked in personal information, and at the time, he was charging $35 to dig up someone’s driving record, $45 for his bank account balances, $49 for a social security number, $84 to trace a mobile number, and $209 to compile his stocks, bonds, and securities. The site offered a simple clickable interface and Amazon-like shopping cart. It’s still around today, boasting similar services. “Licensed Investigators for Accurate Results” reads the tag line, calling itself “America’s premier provider of on-line investigative solutions.”

For Cohn, digging through what I had assumed was personal information, was less challenging than filling in a crossword puzzle. He was able to collect this amalgam of data on me without leaving the air-conditioned cool of his office in Boca Raton, Florida. In addition to maintaining access to myriad databases stuffed with Americans’ personal information, he was a master of “pre-texting.” That is, he tricked people into handing over personal information, usually over the telephone. Simple and devilishly effective. When the story hit newsstands with a photo of Cohn on the cover and the eerie caption: “I know what you did last night,” it caused quite a stir. It was even read into the Congressional Record during hearings on privacy.

All it takes is a person or persons with enough patience and know-how to pierce anyone’s privacy — and, if they choose, to wreak havoc on your finances and destroy your reputation.

A decade and a half later, and given the recent Edward Snowden-fueled brouhaha over the National Security Agency’s snooping on Americans, I wondered how much had changed. Today, about 250 million Americans are on the Internet, and spend an average of 23 hours a week online and texting, with 27 percent of that engaged in social media. Like most people, I’m on the Internet, in some fashion, most of my waking hours, if not through a computer then via a tablet or smart phone.

With so much of my life reduced to microscopic bits and bytes bouncing around in a netherworld of digital data, how much could Nick Percoco and a determined team of hackers find out about me? Worse, how much damage could they potentially cause?

What I learned is that virtually all of us are vulnerable to electronic eavesdropping and are easy hack targets. Most of us have adopted the credo “security by obscurity,” but all it takes is a person or persons with enough patience and know-how to pierce anyone’s privacy — and, if they choose, to wreak havoc on your finances and destroy your reputation.

I’ve never actually met Nick Percoco, which, for all he knows about me, might seem strange.

Earlier this year I contacted him to pen a guest post for PandoDaily. In it, Percoco warned that unscrupulous people could potentially intercept your private messages and inject malevolent code into your computer over a coffee shop’s Wi-Fi. I liked how he wrote the piece. He didn’t hype the threat. Instead he laid out the facts, relayed some anecdotes from his work, and offered basic, actionable prescriptions.

You can tell a lot about a person by the way he writes. As a journalism professor, I get to know my students’ writing better than they know it themselves. And Percoco, through his prose, struck me as someone who was smart, well informed on security issues, and careful with what he said and how he said it. “Comp-sec,” as it’s called – short for computer security – is rife with charlatans. It often seems the more fame someone accrues in that world, the less he’s accomplished and even less he knows.

For this particular job, trust would be vital. If I were to invite someone to wheedle his way into my life, sneak into my finances, sniff my email, capture my web surfing, maybe even break into my home, I had to be damn sure he and the people he worked with wouldn’t use this information for nefarious purposes. I checked up on Percoco and couldn’t find anything that reflected badly on his character.

Over the years [Percoco] has performed hundreds of pen-tests and physical break-ins, slipping into hospitals,
insurance companies, manufacturers, magazine and newspaper companies, power companies, and many more.

Percoco, 38, considers himself a white hat hacker, and has been breaking into companies (with their blessing) for 14 years. In what is perhaps the perfect metaphor for what he does and who he is, he lacks recognizable fingerprints, a quirk of nature, he assures. Once in Colombia, he says, he was denied entry into a building because the turnstile, equipped with a fingerprint identification pad, couldn’t get a fix on his digits. Percoco prides himself on having the skills of a black hat hacker while maintaining what he calls the highest ethical standards.

Not only does he attack computer vulnerabilities, Percoco performs on-site intrusions. Over the years he has performed hundreds of pen-tests and physical break-ins, slipping into hospitals, insurance companies, manufacturers, magazine and newspaper companies, power companies, and many more – clients, he says, that he’s forbidden to reveal.

Once, he says, he was hired to gain access to a hospital’s computer systems housed in a data center. Wandering the hallways, he followed the signs until he saw one for the IT department. It led him to a server room behind a glass door. Inside there was a woman printing out patient records. All Percoco had to do was knock and she let him, no questions asked. He ambled over to a computer with a mouse and in a few clicks logged on as the systems administrator. Now he had access to patient records, and could have, if he’d wanted, taken down the entire network. The hospital’s chief information officer had wanted more resources for security. He got them.

Percoco told me he was intrigued by my proposal because he and his team almost always investigate corporations, not individuals. He wondered aloud whether I would be easier to attack then a corporation or harder. Both he and I were eager to find out.

In 1999, detective Dan Cohn’s most powerful weapons were a telephone and unmitigated gall. True to his word, exactly one week after he started my investigation, he faxed me a three-page summary of my life. It began with my base identifiers – full name, date of birth, social security number, home address – which he obtained from my credit report. Companies like Equifax claim they have protections in place to prevent against fraudsters, but Cohn told me he went through a reseller.

Equipped with my credit header, Cohn had what he needed to access a Federal Reserve database listing my deposit accounts, some of which I had long forgotten – $503 at Apple Bank for Savings in an account held by a long-ago landlord as a security deposit; $7 in a dormant savings account at Chase Manhattan Bank; $1,000 in another Chase account. A few days later Cohn located my Merrill Lynch cash management account, which I had opened a few months earlier. He then had my checking and savings account balances, direct deposits from work, withdrawals, ATM visits, check numbers with dates and amounts, and the name of my broker. In addition to my finances, he also obtained utility bills and two unlisted phone numbers, which cataloged a bevy of long distance and local phone calls I had made.

Armed with this information, Cohn could have easily mapped out my routines. He knew how much cash I withdrew from ATMs each week, how much Forbes deposited into my checking account twice a month, the cafes and restaurants I frequented, the monthly checks I wrote to a shrink. He possessed my latest phone bill and a list of long distance calls to and from my home, including late-night fiber-optic dalliances with a woman I was dating and who worked for an advertising agency and traveled a lot. Cohn also divined phone numbers of a few of my sources, including a couple of computer hackers who had told me of their black hat activities.

While databases assisted him with my basic information, to secure the nitty-gritty detail of my life, he needed help, which he wrangled from the actual companies I did business with.

Part of the deal I struck with Cohn required him to tell me exactly how he did what he did, but he held back when it came time to pony up. To fill in the gaps I contacted my phone company (Bell Atlantic, now Verizon), long distance phone provider (Sprint), and bank (Merrill Lynch), telling them what Cohn had done and demanding an explanation. Each, in turn, launched an investigation. With the results I went back to Cohn, who confirmed the information and added additional detail.

Sprint informed me a Mr. Penenberg had called to inquire about my most recent bill. He posed as me, and had enough information to convince the customer service representative he was me. The caller had the operator run through the last couple of dozen calls I had made. It was a similar story with Bell Atlantic, only this time it was a Mrs. Penenberg who did the dirty deed.

He knew how much cash I withdrew from ATMs each week, how much Forbes deposited into my checking account twice a month, the cafes and restaurants I frequented, the monthly checks I wrote to a shrink.

With Merrill Lynch, Cohn also phoned customer service. This time, however, he was relatively upfront. “Hi,” he said, “I’m Dan Cohn, a licensed state investigator conducting an investigation of an Adam Penenberg.” Later Cohn told me official-sounding words like “licensed” and “state” make him sound legit, as if he worked in law enforcement. Then he reeled off my social security number, birth date and address, which he had gleaned from my credit report, and, he told me later, “before I could get out anything more he spat out your account number.”

Cohn wrote it down then told the helpful operator, “I talked to Penenberg’s broker, um, I can’t remember his name…”

“Dan Dunn?” the Merrill operator asked.

“Yeah, Dan Dunn,” Cohn repeated.

Merrill’s minion then recited my balance, deposits, withdrawals, check numbers and amounts. “You have to talk in the lingo the bank people talk so they don’t even know they are being taken,” Cohn said, obviously pleased with himself.

Such pretext calls are technically illegal under the Gramm-Leach-Bliley Act of 1999, at least if used to obtain financial data from individuals or financial institutions, but it’s rarely enforced and hard to catch.

But I needn’t have worried, Cohn assured me. He promised he would never resell the information to anyone else. “Unlike an information broker, I won’t break the law,” he told me. “I turn down jobs, like if a jealous boyfriend wants to find out where his ex is living.”

At the time, I thought this was an odd statement, strangely specific, which he had volunteered. What I didn’t know was that at the same time he was digging up dirt on me, Cohn was embroiled in a tragic case involving a stalker, who had paid Docusearch to locate his victim.

According to court documents, on July 29, 1999, New Hampshire resident Liam Youens paid Docusearch for the social security number, home and work addresses for 20-year-old Amy Lynn Boyer, another New Hampshire resident. Docusearch went through a subcontractor, Michele Gambino, who relied on pretexting. She called Boyer in New Hampshire, lying about who she was and why she was calling in a bid to trick Boyer into revealing her employment information. Gambino passed this information on to Docusearch, which provided it to Youens.

A week later Youens drove to the dentist’s office in Nashua, New Hampshire, where Boyer worked. He waited in ambush while she got in her car and drove up beside her. Leaning out of his car, he put the barrel against her window. He called her name so that she would look up.

Then he shot and killed her.

Seconds later he turned the gun on himself.

“Amy never knew it was coming,” her stepfather, Tim Remsberg, said in an interview with the tabloid news show, “48 Hours.”

Youens, who was unemployed and lived with his mother, had been stalking Boyer for years, chronicling his obsessions on a web site. On it, he confessed that he had fallen in love with her in 8th grade. Later, after Boyer rebuffed his advances, he decided she must die. On the website, “48 Hours” reported, he foretold how he would kill her:

“When she gets in, I’ll drive up to the car blocking her in, window to window. I’ll shoot her with my Glock.”

Amy Boyer’s mother sued Docusearch, alleging that Cohn and his partner had invaded her daughter’s privacy and broke other laws when it assisted Youens in locating her while the online information broker claimed the information wasn’t private. After the case wound through the courts, the New Hampshire Supreme Court ruled that the lawsuit could proceed to a jury trial, and Cohn and Zeiss ended up settling with the family for a reported $85,000.

Afterward, Cohn promised, “Our policies and the way we do business has changed as a result.”

After Nick Percoco and I hammered out the broad outlines of our project – his team would not break any laws, and they would leave my kids out of this ­–­ I signed a waiver (courtesy of Trustwave’s lawyers) that barred me from suing the company if my information ended up in the wrong hands. Percoco kept the timetable vague and frankly, after a month dragged into two, I almost forgot about it. But his team, comprised of security analyst Garret Picchioni, digital forensics specialist Josh Grunzweig, and hacker Matthew Jakubowski (Jaku), were anything but idle.

Percoco didn’t tell me who my investigators would be, and even if he had told me in advance it wouldn’t have done me much good. Like most information security professionals who pen-test for a living, Picchioni and Grunzweig had taken steps to limit their online footprints. Google their names and you won’t find all that much, other than they have all given presentations at hacker conferences on highly technical topics.

Garret Picchioni’s Twitter bio says “Information Security Professional for {redacted}, Network Engineer, and resident pain in the ass” accompanied by a photo of South Park’s Cartman wearing a cheese hat. His LinkedIn profile also reveals little. He’s been in the information security business since 2004, authored an academic paper that analyzed more than 2.5 million anonymized passwords, too six years to graduate from the University of Arizona, where he majored in history and minored in information security). Meanwhile, SpiderLabs “has performed over a thousand incident investigations, thousands of penetration tests and hundreds of application security tests globally.”

Josh Grunzweig is even more stealth. His Twitter bio is simply “malware reverser | beer drinker | hockey fan” and his LinkedIn profile barely qualifies as a profile. He graduated from Rochester Institute of Technology with a degree in Applied Networking and System Administration, and minored in criminal justice. Some activities he listed are information security, snowboarding, running, movies, music, traveling, and grabbing a drink with friends.

Of the three, Matthew Jakubowski, or “Jaku,” as he likes to be called, has the most Google juice. Last year he turned a dry erase marker into a tool that could pick a hotel lock in seconds flat. In the avalanche of media attention that followed, he revealed that he could steal credit cards wirelessly using a radio identification reader without your having to pull your Mastercard out of your wallet. His Twitter bio warns, “Neque dicas, quid neque,” which in Latin means “Don’t tell me what to do.” According to his scant LinkedIn profile Jaku majored in “Sandwich Engineering” and minored in “Witch Hunting” at “College University.”

Percoco told me they began the project by pulling up everything they could about me on the Web, sifting through my website and various writings, looking for anything that could point to potential vulnerabilities. They gleaned some interesting nuggets, including the type of computer I use (I’ve written that I’m an Apple aficionado), my home and work addresses (easily found through public records searches), and the location of the Pilates studio my wife, Charlotte, owns and operates. This helped them formulate a plan of attack.

Here’s the strategy they sketched out (from the confidential report I was provided afterward):

After doing some initial research on Adam and his family, a preliminary game plan was created before traveling onsite that included both technical and physical (security) attacks on Adam.

The initial rough plan is outlined as follows and included multiple attack vectors as contingency plans:

Just rereading that feels weird. Even though I brought this on myself, I still marvel at how many attack vectors someone like me can provide any would-be attacker. Substitute your name for mine; your wife’s, husband’s, or partner’s business for my wife’s; your office locations for mine. How would you feel?

SpiderLabs’ three-member team failed at some of these tasks, like 1) breaking into my apartment, 2) cracking the security on my Time Warner cable modem, and 6) gaining access to my computer and office at NYU. Sneaking into my home would have necessitated coming through neighbors’ apartments or trespassing through their yards, or climbing a fence at the courthouse down the street. One thing they did not want to do was violate any laws. Others, like 8) luring me to a malicious blog and 9) using my web designer to help them access my website, turned out to be unnecessary.

Still, what they did end up doing is impressive. They flew to New York on August 20th to stake out my home and immediately ran into problems that an urban environment can present. Brooklyn Heights is saturated with Wi-Fi networks. The team sniffed 1200 of them within a tenth of a mile radius of my brownstone. The fact they knew I use Apple computers narrowed it down somewhat, since they determine that through their canvassing. But they couldn’t identify, with any certainty, which specific Wi-Fi network was mine, and they could run afoul of the law if they intercepted traffic from someone else’s.

They then repaired to my wife’s Pilates studio, located 10 blocks away, and confronted similar wireless saturation. From the 2nd floor of a Barnes & Noble they could see through the studio’s side windows, which offers a limited view inside. While they had pictures of my wife they found online on her studio’s website – just typing that creeps me out – they couldn’t see her while she was working nor could they determine her work schedule.

One bench gave them a bird’s eye view of my front stoop if they looked through binoculars. From there they watched my wife and I come and go.

As a result, they hatched a plan for a “client-side attack.” A female friend of Jaku, the hacker, signed up for a Pilates group class at my wife’s studio. Since Charlotte only teaches private sessions at Streamline (although she runs a class at another studio she operates, but it has a private membership) the friend enrolled in an introductory class taught by one of the other instructors. Before leaving she left behind a large purple flash drive in a changing room. The SpiderLab’s team hoped an instructor would find it and plug it into the studio’s computer in an attempt to identify the owner. The flash drive held various payloads titled “Resume” but would actually install a remote backdoor on the system upon opening of the file and “phone home” to the team.

No one, however, plugged the thumb drive into the studio’s computer. A few days later Jaku took the decoy back to the Pilates studio for another session, this time equipped with another flash drive. After the class was over the decoy informed the instructor that she had a job interview shortly after class, and asked if she could print out her resume, which was located on the flash drive. What the team didn’t know was that the studio runs an old version of Apple’s operating system – so old, in fact, that the hacker program Jaku coded couldn’t execute its nefarious deeds.

Meanwhile, the team, back in front of my apartment, had to cope with nosy neighbors. I live in a city but my block is quiet and residential, home to many families. The SpiderLabs guys had a police scanner tuned to the local Brooklyn Heights precinct, just in case someone called the cops. Three men hanging around in front of my building, however, was bound to attract attention, and it did. While trying to secret a laptop computer behind a potted plant on my stoop in an attempt to try and isolate my Wi-Fi network, a woman in a red shirt glared from a short distance away. Eventually she gave up. Another neighbor confronted the men as she was walking her dog, telling them she had noticed them hanging around the past few days. Picchioni, the team leader, finessed an answer, claiming they were from out of town, here on business, and wanted to work outside because it was such a nice day.

The SpiderLabs gang had been put on notice. They ended up renting a ZipCar and trawled around the front of my building by hiding in the back of the car and whiling away hours in a nearby park. One bench gave them a bird’s eye view of my front stoop if they looked through binoculars. From there they watched my wife and I come and go.

Around this time, I published a piece on PandoDaily about my experience with an iPad app that coaxes children into purchasing virtual crap if they want to progress in the game. I talked a bit about my own children’s screen habits and how they read insatiably on Kindle Paperwhites. I wrote: “I prefer ebooks to hardcovers and paperbacks because we live in Brooklyn and don’t have space for all the books they read. Our basement is packed with them. Feel free to come by and cart them away to your favorite library or charity.”

Shortly after my piece posted, a woman on Twitter asked if she could take me up on my offer. It was a real Twitter account, which, I learned later, belonged to a friend of Jaku’s. “We really wanted to get into your basement,” he later told me. Not suspecting anything, I responded that my wife and I would have to go through these books before we’d give any away.

Really, though, all this on-premises mishegas would turn out to be for naught. Like Dan Cohn, the team from SpiderLabs was able to get the information they sought through other means. Not with pretext calls, which are oh-so last century. Nick Percoco and his minions are children of the Internet, and have little need of a telephone. Instead, they know the art of the phish.

The first one they tried was a message to me from a student in Ohio who expressed interest in attending NYU to study journalism.

I read the email but didn’t open the attachment because it was a file type I didn’t recognize. I remember thinking why would a high school student send me an attachment with a JAR suffix? Plus, I was on break from teaching and filed the email away for the week after the semester would begin.

Since I didn’t reply the team took aim at Charlotte with a phish.

When Charlotte didn’t respond, they re-sent the email, and at 4:30 p.m. ET on August 27, she clicked on the link and by doing so downloaded the malware that Jaku had coded especially for us.

The video didn’t work, so Charlotte sent a reply, telling “Amber” that while she couldn’t meet over Labor Day, she would like to see her resume, and said she couldn’t open the video clip.

There was, however, a bug in the malware (Jaku says this was his first time writing it for a Mac) and the SpiderLabs gang couldn’t maintain persistent access. So they replied to Charlotte’s reply. This time, instead of a web link the payload was a zip file:

This time, the newly updated OSX malware was dropped on to her machine and SpiderLabs had complete access to her laptop whenever it was on the Internet.

They had access to our checking and savings accounts, a corporate bond account, our credit card statements and online bills. They could have, if they had wanted to, wipe us out financially.

On Charlotte’s machine were our family’s W2s, which included our social security numbers as well as our income and all of our deductions, paperwork and copies of credit card and banking statements. They also came upon a password to our home router. More frightening, they discovered her password and log in to our Chase online banking account.

They had access to our checking and savings accounts, a corporate bond account, our credit card statements and online bills. They could have, if they had wanted to, wipe us out financially.

Chase.com uses a two-step verification system, which momentarily stymied SpiderLabs’ hackers. Every time she or I logs on from an IP address that Chase doesn’t recognize, it offers to send us an activation code via text to our mobile phones. But a search of Charlotte’s hard drive revealed Chase cookies, which the team copied and used to convince Chase that she was logging in from home. While inside they had access to our checking and savings accounts, a corporate bond account, our credit card statements and online bills. They could have, if they had wanted to, wipe us out financially.

What’s more, buried deep on the hard drive, they located something else: old files of mine. Some years earlier I had bequethed Charlotte my old PowerBook G4 Titanium, and didn’t bother to wipe clean the hard drive. Months later I smelled acrid smoke in our apartment and saw that the keyboard was on fire. After I put out the flames, the laptop refused to boot up. (The motherboard had melted.) We brought it to the Apple Store and staff — I refuse to call them geniuses, except ironically — copied the hard drive to a new Mac laptop. That was two or three computers ago, and each time my wife has had her hard drive ported over to the next machine. All these years these files of mine have persisted. One of them contained passwords for several online accounts, including Amazon.

In and of itself, you might think this wasn’t much of a find. So what? The SpiderLabs boys could rack up charges on my Amazon credit card. But like many people, I have developed my own system for passwords. Because I can’t possibly remember every single one to every site I use not only do I reuse passwords, I also have come up with an informal formula to create them. I might spell out a common name like Gracie (my old cat) but spell it ‘Gray see’ and use an ‘8’ to stand in for the ‘G’ and a ‘5’ for the ‘s.’ You get the idea. Recall that one of SpiderLabs’ team members is an expert in computer forensics. It didn’t take him long to crack all of my passwords.

The SpiderLabs gang broke into my Twitter account and tweeted “I love Stephen Glass,” which led to some head scratching on Twitter from those who know my role in that story. (I’m the one who outed the serial fabulist from The New Republic.) They breached my Facebook account and ordered 100 plastic spiders from Amazon then had them shipped to my home. And they cracked my iCloud password, sending me an email with the subject: SpiderLabs was here and a message consisting of a single emoticon: :-)

Once they cracked iCloud they activated the “find my iPhone” app. Apple had also enabled this functionality for laptops, so they put both my iPhone and laptop in stolen mode.

The first I learned to what extent SpiderLabs had penetrated my privacy was during my class at NYU, when my laptop shut down and demanded a four-digit code to gain re-entry and my iPhone began beeping.

During our debriefing, Percoco told me that I had been, in some ways, more difficult to get to than many of his corporate clients. With a company employing thousands, there are thousands of potential vulnerabilities that can be attacked. What’s more, the rules are more constrained. For example, a corporate client will tell SpiderLabs which specific servers to target once they’re inside the network or what division to focus on within the corporate hierarchy.

With me, however, there were fewer paths that could lead to the mother lode: my laptop, email, bank, social media accounts, and home. Once in, though, his team found few firewalls protecting my data, and mostly in the form of a pastiche of passwords and log-in credentials. These, I quickly learned, were not secure.

My wife, Charlotte, was practically speechless when I told her about the hack. I had not given her any advance warning, hoping to keep the experiment as realistic as possible. At first she was fascinated, but the more she thought about it, the more uncomfortable she became. The idea that an undercover client had visited her studio and a team of spies had put our home under surveillance made her uneasy. She was relieved, as I was, that our children had been off limits.

“Promise me you’ll never do anything like this again,” she said. And, of course, I did.

Earlier this month, Percoco left SpiderLabs for a new job as Director at KPMG, the professional services firm, in the Information Protection practice where he’s running the same kinds of penetration tests.

As for me, since we concluded this exercise I’ve changed my passwords and log ins but I don’t delude myself into thinking I’m protected from prying eyes — the government’s or anyone else’s, if they belong to someone with the right combination of skills, resources and determination.

Adam is the Editor of PandoDaily and a journalism professor at New York University. He has written for The New York Times, Forbes, Fast Company, the Economist, as well as many others, and is the author of several books, including the critically acclaimed "Viral Loop." His latest is "Play at Work: How Games Inspire Breakthrough Thinking."

Cirze's World

Cirze's World

Beth and Lily Calmly Monitor Farmers Market Traffic

Cirze's World

Oscar Wilde

"I choose my friends for their good looks, my acquaintances for their good characters, and my enemies for their good intellects. A man cannot be too careful in the choice of his enemies."
Oscar Wilde, The Picture of Dorian Gray, 1891

Harold Pinter

It never happened. Nothing ever happened. Even while it was happening it wasn’t happening. It didn’t matter. It was of no interest. The crimes of the United States have been systematic, constant, vicious, remorseless... while masquerading as a force for universal good. It’s a brilliant, even witty, highly successful act of hypnosis.

Chickenhawks Galore

Peace

"A man of peace is not a pacifist; a man of peace is simply a pool of silence. He pulsates a new kind of energy into the world, he sings a new song. He lives in a totally new way his very way of live is that of grace, that of prayer, that of compassion. Whomsoever he touches, he creates more love-energy. The man of peace is creative. He is not against war, because to be against anything is to be at war. He is not against war; he simply understands why war exists. And out of that understanding he becomes peaceful. Only when there are many people who are pools of peace, silence, understanding, will the war disappear."